Special deposits and the supplementary special deposits Corset were historical Bank of England tools for withdrawing bank cash and restraining liability growth.
Special deposits were balances that UK banks could be required to place with the Bank of England as a historical instrument of monetary control. The Supplementary Special Deposits scheme, widely called the Corset, was a related growth-based control used intermittently from 1973 to 1980. It required covered institutions to place non-interest-bearing deposits with the Bank when specified interest-bearing sterling liabilities grew faster than permitted.
These arrangements belong to the history of UK monetary control. They should not be confused with current bank-capital, liquidity, reserve-account, deposit-insurance, or resolution requirements.
The Bank of England’s historical special deposit scheme existed from 1960 with modifications. Under the arrangements announced in 1971, banks observed a minimum reserve-assets ratio and could be called upon to place additional special deposits with the Bank on a uniform basis related to eligible liabilities.
The Supplementary Special Deposits (SSD) scheme added an incremental control. It focused on the growth of interest-bearing eligible liabilities (IBELs), described by the Bank as essentially covered institutions’ interest-bearing sterling deposits. If those liabilities grew beyond an allowed rate, the institution had to place supplementary, non-interest-bearing funds with the Bank.
| Feature | Special deposits | Supplementary special deposits, or Corset |
|---|---|---|
| Basic trigger | A call by the Bank of England under the prevailing framework | Growth of an institution’s IBELs beyond a permitted path |
| Assessment base | Eligible liabilities under the applicable arrangements | Incremental excess growth in IBELs |
| Immediate effect | Withdrew cash from the banking system | Tied up progressively more funds as excess growth increased |
| Policy role | Reinforced monetary control over a longer horizon | Discouraged rapid interest-bearing sterling deposit growth |
| Main weakness | Direct controls could distort bank behavior and money markets | Encouraged substitution and diversion into channels outside the measured base |
The Corset was therefore not merely another name for every special deposit. It was the nickname for the supplementary, growth-linked scheme.
UK banking changed after the Competition and Credit Control reforms of the early 1970s. Banks increasingly used liability management: rather than waiting for deposits and rationing lending, they could compete for interest-bearing funds to finance assets. Strong credit demand and expanding wholesale funding made broad monetary aggregates harder to restrain through reserve pressure alone.
The Corset aimed to alter that funding calculation. If a bank expanded covered interest-bearing liabilities too quickly, part of the excess had to be placed at the Bank of England without interest. The institution then faced a lower return on the marginal package of deposits and lending.
The policy chain was intended to work as follows:
This was an indirect constraint on credit expansion. The scheme did not evaluate each loan or impose the same numerical lending ceiling on every bank.
Let:
A one-rate teaching model would calculate the supplementary deposit as:
where (s) is the applicable deposit proportion. The historical scheme was more complex: it used progressive marginal requirements, so larger overshoots could face higher proportions. A more faithful general form is:
where (E_j) is excess growth falling within tier (j), and (s_j) is that tier’s required proportion.
These equations explain the mechanism; they are not a reconstruction of every historical definition, exemption, tier, or measurement period.
Assume a bank begins with an illustrative IBEL base of GBP 200 million and is permitted to grow that base by 8% during the period.
If actual IBELs reach GBP 228 million, excess growth is:
Suppose, only to illustrate progressive mechanics, the first GBP 5 million of excess attracts a 10% supplementary deposit and the remaining GBP 7 million attracts 25%.
The bank would place GBP 2.25 million in a non-interest-bearing supplementary deposit under this hypothetical schedule. The cost is not a GBP 2.25 million expense on day one. Rather, funds are tied up without interest, lowering the return on the marginal funding-and-lending strategy while the requirement applies.
Actual historical calculations depended on the scheme version, observation period, permitted growth path, liability definitions, exemptions, and progressive rates. The example must not be used as a historical rate table.
The scheme affected both liquidity management and profitability:
The accounting balance itself did not equal the policy’s economic cost. Analysts would need the deposit amount, duration, foregone market return, funding cost, tax treatment, and behavioral response to estimate the effect on profit.
Within the Corset, interest-bearing eligible liabilities were a scheme-specific measure centered on interest-bearing sterling deposits. The precise definition and exclusions changed with the operating rules, so a historical series should be read with its contemporary notice or statistical notes.
This term can be confused with Eligible Liabilities in modern bank resolution. Modern eligible liabilities may qualify toward loss-absorption and recapitalization requirements such as MREL. They are not the deposit base used in the Corset calculation.
The same words can therefore refer to different balance-sheet populations:
| Context | Meaning of eligible liabilities |
|---|---|
| Corset and historical monetary control | Covered interest-bearing sterling liabilities used to measure bank funding growth |
| Reserve framework | Liabilities used as a base for a reserve or reserve-assets calculation under that framework |
| Modern resolution framework | Instruments meeting legal conditions for loss absorption or recapitalization |
Always identify the framework, date, jurisdiction, and definition before comparing figures.
The chronology helps prevent the Corset from being treated as a current rule:
The Bank’s later review found that the scheme was largely effective in containing wholesale deposit growth but encouraged diversion of banking business into other channels. That result is central to interpreting the policy: a control can change the measured balance-sheet category without reducing underlying credit activity by the same amount.
Direct controls become less effective when institutions can redesign funding, move transactions, or use markets outside the controlled perimeter. The removal of UK exchange controls in 1979 also made it easier to channel activity abroad. By 1980, the Corset’s distortions and leakage were increasingly inconsistent with the evolving monetary framework.
Its abolition should not be explained by one factor alone. The broader lesson was that controls tied to a narrow liability measure could:
| Tool | Primary purpose | Why it differs from the Corset |
|---|---|---|
| Reserve Requirement | Requires specified reserve balances or assets against a defined base | Usually applies to a stock or average base rather than only excess growth under the historical SSD schedule |
| Bank Reserves | Central-bank money held by eligible institutions | Describes an asset; it is not itself the historical penalty formula |
| Prudential liquidity requirement | Promotes resilience to cash outflows and funding stress | Focuses on safety and liquidity risk rather than a historical broad-money target |
| Capital requirement | Requires loss-absorbing financial resources | Addresses solvency and loss absorption, not deposit-growth control |
| MREL eligible liabilities | Supports write-down or recapitalization in resolution | Concerns resolution capacity, not interest-bearing sterling deposit growth |
Calling the Corset a modern liquidity buffer obscures its policy objective and transmission mechanism.
Before drawing a conclusion, verify:
A decline in measured IBEL growth does not by itself prove an equal decline in total credit. Analysts should look for balance-sheet substitution and financing outside the controlled institutions.
This article provides historical financial education, not current regulatory, compliance, legal, accounting, or investment advice. Use the applicable rulebook and current Bank of England or regulatory materials for present-day decisions.